Astral Poly Technik Stock Story will leave you impressed. It has made some rapid strides in the last few years. It’s a leader in its niche CPVC Pipes & Fittings industry segment. It continues to grow robustly with compounded annual growth of over 50% in Sales over last 5 years!
With its excellent fundamentals, Astral Poly Technik made it easily to our shortlist of promising small-cap stocks – that our in-depth process for hand-picked stock-picks throws up.
There are a few questions that came up during our detailed analysis on Astral Poly Technik, its prospects, and risks as we see it. (of course that is entirely based on published sources and without the benefit of a meeting/interview with Management).
We put forward these questions to Astral’s Management with a request for a meeting/visit to its premises. We visited and talked with CFO Hiranand Savlani for over 2 hours, who patiently answered all that we posed.
1. ASTRAL HAS HAD A BLAZING RUN OVER THE LAST DECADE. SALES AND PROFITS HAVE GROWN AT OVER 40% CAGR. APL WILL PROBABLY DO OVER 400 CR IN FY11. THAT’S A SUPER ACHIEVEMENT. CONGRATULATIONS!
What are the future plans? Where does the company see itself in the next few years? We have heard the company talking of maintaining a 30%+ growth rate and a 1000 Cr turnover goal – Kindly explain what it will take to achieve this and what are the important milestones in this journey?
The market is huge and there is enough space for more players. we see us growing at 30-35% CAGR for the next few years. If we execute well, a Rs. 1000 Cr turnover is achievable within the next 3 years. New innovative product introductions and maintaining the quality of our distribution network and strengthening it will be key factors.
We ask all our shareholders to be long-term investors, and stay invested for the next 5 years. It will be a rewarding journey for all of us stakeholders in the company.
2. CPVC RESIN SEEMS AVAILABLE FROM MULTIPLE SOURCES; CPVC COMPOUND AVAILABLE FROM NOVEON USA & AKREMA, FRANCE. NOVEON PATENTS ARE SET TO BE EXPIRING/EXPIRED
Please demystify this market for us. What is really patent protected, and for how long? Apart from Noveon and Akrema are there other licensors of CPVC compound? Are people able to make CPVC pipes with CPVC resin and indigenous compound knowhow??
Patents have expired. But the availability of the compound is a key constraint. Apart from Lubrizol, there are some 3 other known manufacturers. Akrema of France, Kaneka and Sekisui of Japan.
There some 20 CPVC pipe manufacturers in India today. Most of the non-Lubrizol licensee capacities are at a nascent stage and in 100s of tonnes. The largest may be some 3000 tonnes. The availability of the CPVC compound (other than Lubrizol) is a key constraint. Many are experimenting with in-house compounds, but are not able to scale up majorly without a guaranteed RM source.
3. GI PIPES & STEEL PIPES ARE STILL THE MAINSTAY OF PLUMBING AND FITTINGS MARKET IN INDIA. SOME STUDIES ESTIMATE GI PIPES CONTINUE TO HOLD OVER 50% MARKET SHARE, WHILE THE PVC/CPVC MARKET IS STILL SOMETHING LIKE 5% OF THE MARKET.
Kindly give us your estimate of the current Indian market for plumbing & fittings. How do you see CPVC/PVC market growing in the next 5 years? Is CPVC likely to replace PVC totally or both will continue to co-exist.
This is difficult to put an exact figure on. By all accounts this is a huge market. The GI market itself a Rs 7,000 Cr market as on today. SWR pipes (PVC based) is reportedly a Rs.3000 cr market today. One Mumbai distributor alone is doing a Rs 50 Cr business just from SWR. Then there is Underground drainage systems which is big. There is Blazemaster potential market of atleast 700 Cr. In all, the total market for pipes and fittings in India is by some accounts a Rs. 20,000 Cr market, today.
GI Pipes days are over. The organised construction players have already switched. End users are aware, depending on the location and corrosiveness/water properties the life varies form 7-10 to 12 years for GI. Whereas CPVC has no such problems.
The plumbing community is a big pusher towards CPVC. Their productivity has gone up as the handling/fitting is much easier (Just an adhesive glue, rather than threading and refitting and the like). If they could construct one GI bathroom a day, they are able to finish 3 bathrooms today in the same time. They also find the product, fittings & installation hassleless and are the biggest promoters for CPVC pipes & fittings.
4. EXPORT MARKET POTENTIAL. 30% IN KENYA JV. LUBRIZOL LICENSING POLICIES
Exports are a very small market for Astral today. Are there any ambitions to scale up this segment? Tell us more about the Kenya JV, Is there any strategic intent, and why Kenya? What is Lubrizol licensing policy for markets other than India? Do you have any leeway for south asian and middle-east markets or are they subject to separate licensing?
The Kenya market license is with Astral Poly Technik and we have extended it to the JV. It is Lubrizol which asked us to look at that market and we preferred to set it up jointly with another entity where the risks are spread. As you might have seen we have increased the stake, and have the rights/mechanism to increase the stake in proportion to market development.
We have a very big domestic market to take care of, first.
5. OTHER NOVEON LICENSEES IN INDIA INCLUDE AJAY INDUSTRIAL CORP AND ASHIRVAD PIPES PVT LTD. ASHIRVAD PIPES HAS OVER 50,000 MT CAPACITY AND A 2008 RECIPIENT OFNATIONAL AWARD FOR OUTSTANDING ENTREPRENEURSHIP IN MEDIUM ENTERPRISES. AJAY INDUSTRIAL CORP HAS OUTSTANDING GROUP COMPANIES LIKE PRECISION PIPES (LARGEST SUPPLIER OF AUTOMOTIVE EXTRUDED PARTS) AND AJAY POLY (LARGEST SUPPLIER OF EXTRUDED REFRIGERATION SEALING SYSTEMS)
These are pedigree companies. How serious is the competition? Is it head-to-head in Flowguard Sales, or do you/they have an edge in some segments within Flowguard range. If you have any competitive advantage over these two, what would those be? Does your/competition distribution network play a significant role? Are there any regional markets that you/competition dominate?
These are also big players in this market and there is room for all to grow. Both are unlisted players and we are not aware of much details on their dedicated CPVC capacities. We have strong presence in West and South markets and now turning the focus to North and East.
6. CPVC LICENSING AND MANUFACTURING.
Kindly explain the role that Lubrizol & Specialty process LLC plays. What is the kind of relationship that you enjoy with them, and are you deriving any competitive advantage from the strength of these relationships today? Why aren’t say established PVC/GI players moving fast in CPVC? What prevents them from approaching Lubrizol with bigger plans than yours? What about manufacturers setting up plants in say Nepal and target Indian markets?
Lubrizol has policies that are licensee-friendly and protects the licensees that take the initial market risk with them. In a market like US, they have appointed only 4 licensees over the last 42 years. That speaks a lot for their policies.
When we take initial market risk for a product and are the first licensee, usually we are assured of a 5yr exclusivity. I am not just taking the license, I am spending money and effort in UL certifications (where they stress the product in test conditions for over 18 months) and other market development activities. Lubrizol has an equal stake in making us succeed -those who take the early risk.
Q: So, did you get an exclusivity on Flowguard license?
Yes, The others have the license only since the last 6 years. We have had that for the last 11 years.
For the Indian market Lubrizol had first approached the established bigger players like Supreme and Finolex in 1998-99. However when they did not take up on that offer, an unknown entity like Astral Poly Technik came forward and took on that initial market risk.
Like for any other market, Lubrizol understands the peculiarities of the Indian market. We have taken the early risks and have developed the market from scratch and we have had their constant support. We have a strong relationship. It is unlikely to jeopardise a relationship that goes back so many years, especially when we are giving them high growth. Peculiarities of the sub-continent are not unknown to them! Anyone getting a license for manufacturing in Nepal or other such places is probably remote.
7. BLAZEMASTER FIRE SPRINKLER SYSTEM – YOU HAVE THE LUBRIZOL LICENSE SINCE 2008. DESPITE HAVING THE NSF & UL CERTIFICATION, LOCAL BIS CERTIFICATION IS YET TO BE RECEIVED, FOR WHICH APL HAS BEEN DOING THE GROUNDWORK FOR LAST 2 YEARS.
Kindly explain the importance of Blazemaster to product plans and future growth of the company. Realistically when do you see a pan-India launch? While this will give you an edge over other Noveon licensed CPVC manufacturers, how long do you expect to sustain this first-mover advantage? All your groundwork in getting local approvals actually works to the advantage of the guy moving in next after you! Lubrizol must be aware of the situation – what kind of guarantees do you have from them for protecting you on this front for the Indian market.
Blazemaster Fire Sprinkler system has very big potential and it has ready acceptance from the corporate segment. We are hopeful of an early launch. There is a review slotted in May/June by the standardisation body. It may or may not come through this time. But we are almost there, all the groundwork is done.
Blazemaster should also enjoy a 5yr exclusivity.
8. NEW PRODUCTS SWR PIPES, UNDERGROUND DRAINAGE PIPES, FOAM CORE PIPES, MANHOLES AND INSPECTION CHAMBERS.
Kindly explain the process of new product introductions in the Indian market. Do you require to take specific BIS/ISI approvals for each of these products. What is the status on pan India launch for all these products? Currently what is the revenue contribution from new products?
Blazemaster is the only product for which BIS approval is required as Fire Sprinkler is a category that needs to go through the standardisation process. None of the other products require such approvals.
Pan India launch and availability is a long slow process. It usually takes from 3-4 years. Most of the new products are finding good acceptance and growing very strongly. SWR Pipes is doing very well. It will be some time though, before we have significant revenue contributions from new products.
9. PRODUCT SEGMENTS, GEOGRAPHICAL SEGMENTS, REPLACEMENT MARKETS
Kindly give us an idea of the revenue contribution & margins from major product segments, also rural and urban markets, and replacement market. Which segments are expected to drive growth in next 2-3 years, where is the company’s focus and why? How much do the brands Flowguard and Corzan contribute today to revenues and going forward what’s the scenario? How big is the lead free PVC segment?
CPVC Pipes & fittings contribute 65% of the Sales mix. PVC products bring up the balance 35%. Pipes contribute 55-60%, while fittings contribute 35-40%, rest is from others. Traded goods constitute roughly 10% of Sales -mostly Solvent Adhesives and some fittings where the volumes do not justify manufacturing. We are manufacturing some 700 varieties of fittings ourselves, today.
10. CUSTOMER SEGMENTS –TOP CUSTOMERS & REPEAT BUSINESS
What is the revenue split between residential and commercial projects currently, and how is it expected going forward? Does this business lend itself to deeper relationships with reputed builders/contractors? Who are your top customers in FY11
Our sales are distributor driven and is difficult to give any breakups. Most of the revenues come from the residential segment and if were to put a figure it could be around 60-65%. This year we have started focusing on the replacement market too. Usually big builders have repeated us in subsequent projects.
11. COMPETITION STRATEGIES
Sooner or later bigger players with stronger brands (like Finolex, Supreme) will move into the CPVC market. It’s quite possible that these brands will have much stronger customer acceptance & pull than first-mover Astral. Kindly explain the company’s current thinking, brand building exercises undertaken and future plans.
As mentioned before, there are some 20 CPVC manufacturers in the country today. And all of them are playing a role in expanding the market as today everyone has good things to say about CPVC. In the earlier days the bigger PVC players were not so generous. We are happy about that.
Most of the non-Lubrizol licensee capacities are at a nascent stage and in 100s of tonnes. The largest may be some 3000 tonnes. The availability of the CPVC compound (other than Lubrizol) is a key constraint. Many are experimenting with in-house compounds. Also they have not been able to meet Lubrizol’s price point, and in a price-conscious market like India, that is often the bottomline!
12. CAPITAL EXPENDITURE. TO GROW SALES, ASTRAL NEEDS TO CONTINUALLY INVEST IN CAPACITY EXPANSION. WE HAVE HEARD CAPACITY EXPANSION PLANS TO 60000 MT FOR FY12.
What kind of capital expenditure will be required for this latest expansion. Some of the private players like Ashirvad Pipes Pvt Ltd. reportedly have expanded capacities to 70000 MT. How strong is the demand position? Is there a likelihood of overcapacity in the short to medium term?
Ashirvad Pipes is also a strong player. How much capacity is dedicated to CPVC I am unable to comment. There is enough demand for all of us to grow strongly in this market. We are looking to expand to 70,000 MT by this year end.
As you know we have acquired land at Dholka, Gujarat and a leased facility is available in Hosur, Karnantaka. We also have another 75000 sq mt of land in Dahej under our subsidiary Astral Biochem. Land is a key constraint in expansion plans, we have enough land acquired to meet our expansion needs for the next 4-5 years.
The Dholka plant will be a 25000 MT expansion which will come up in FY12. Hosur facility may be taken up subsequently as we need more capacity. The existing plant which has 45000 MT capacity can accommodate another 15000 MT or so.
Capex is done in a phased manner. We usually try to create capacity that we will need for the next year, a year ahead. You may have noticed most of the capex happens in the last one or two quarters of the financial year. Funding is not an issue today as we have strong cash flows and strong balance sheet, that we can leverage judiciously.
13. BACKWARD INTEGRATION. IN OCT 2010, APL BOUGHT 85% STAKE IN ADVANCED ADHESIVES PVT. LTD. THE SUBSIDIARY COMPANY WILL MANUFACTURE SOLVENT CEMENT IN INDIA.
What are the plans on this front? Is this only for captive use or for generating additional sales as well? What kind of capex will be required going forward?
How much was the expense incurred in Solvent cements RM as a percentage of Sales? Is it mainly used for pipe fittings? What will be the contribution towards margin expansion, if any, on account of this?
Solvent cements accounted for roughly 6% of Sales as an expense item. This will be used for captive use and also supply to local players.
14. MARGINS – SUSTAINABILITY. THERE HAS BEEN A SLIDE IN MARGINS EVERY QUARTER FOR THE LAST 4 QUARTERS. OPERATING MARGINS (EXCL OTHER INCOME) HAS ACTUALLY SLID FROM OVER 16% TO JUST OVER 11% IN Q3FY11 – A SIGNIFICANT CONTRACTION OF OVER 5%! (RAW MATERIAL/SALES HAS REMAINED BETWEEN 64%-66.5% ROUGHLY)
Kindly explain the circumstances leading to this. Is this a short-term scenario and have we seen a good reversal in Q4 given that historically this is your best quarter? What levels do you see margins sustaining in the next 2-3 years?
PVC market is a highly crowded space and the OPM levels are not more than 8-10%. It’s a sort of a commodity business now. With more acceptance of CPVC and competition coming in, would it happen for CPVC market also…if not why? Where do you see margins sustaining over the next 2-3 years?
What you are comparing is sequentially quarter on quarter basis. A better comparison would be comparing annual figures where there has been a smaller decline. We should be within the historical 13-15% range on annual basis.
Whenever we introduce new products in the market, we go aggressively after market share. FY10 and FY11 has seen many new product introductions and therefore there is a dip in margins. We believe that at the rate we are growing, we have to take some margin pressure along our stride, as long as we stay within the historical range. Eventually economies of scale will deliver.
15. RAW MATERIALS – CPVC COMPOUND, PVC RESIN. RISK MANAGEMENT
With a rising crude prices scenario, raw material pries must be a cause for strain. Kindly explain how the company manages raw material price volatility risks. Does it get any advantage from sourcing majority of RM from Lubrizol? How often does it revise prices? Are you able to pass on price increases? How often have you resorted to price increases in FY11? When crude had crossed $150 in 2008, were you able to raise prices? What is the outlook for FY12?
How much is CPVC compound as a percentage of total RM? Do you see any risks in being tied to a single supplier (Lubrizol) for majority of RM requirements? Where do you source your PVC requirements from – RIL?
We used to get 180 days credit from Lubrizol earlier. Now it is 120 days. They do not revise prices often. Earlier it used to be once a year. With the current volatility it is more like once in 6 months. It is unlike the PVC supplier quotes which react instantly on spot rates and updates are sent on SMS! About 60% of RM is on account of CPVC.
16. FOREIGN CURRENCY – IMPORTS & FCNR LOANS. RISK MANAGEMENT. APL HAD INCURRED A LOSS OF RS.13.44 CR ON EXPOSURE TO FOREX DERIVATIVE CONTRACTS. IN FY10, THE FCNR LOAN STOOD AT 23.5 CR AND IMPORTS AT 104 CR.
What is the current FCNR loan position? Have all forex derivative contracts expired in full? After the FY09 experience, can you confirm that forex risk management practices adopted by the company are more conservative now?
There are no outstanding long-term contracts. FY09 was a difficult year. Forex volatility Management is part of regular business, we do not foresee extreme impact like that experienced in FY09.
17. SALES DISTRIBUTION NETWORK. DISTRIBUTION POLICY. 250 DISTRIBUTORS, 5500 DEALERS. TYPICAL OTHER EXPENSE SPENDS ARE 12-15% OF SALES.
How strong is the dealer/distribution network today? How important is the distribution network to sales growth for Astral? How does the company support this distribution network? Typically what kind of budgets do you allocate for Sales & Marketing spends?
We have 350 distributors and 7000 dealers today and we are constantly looking at strengthening this network. We believe this loyal distribution network is a core strength. The direct sales force works to nurture this network, as all sales incl. project sales are also routed through this network. We help dealers penetrate new markets by sharing promotional costs. We have recently taken on Mudra as the Ad agency for a promotional campaign with a 1cr budget. There is no fixed budget allocation for Sales & marketing spends, but is decided based on the targets set for the year.
18. DIVIDENDS. DIVIDEND POLICY. PAYOUTS
The company has started distributing dividends since 2008, Dividend payouts as a percentage of net profits has been rising, but still pretty low at ~8%. Kindly elaborate on the dividend policy followed by the company.
As you know we are growing at a strong pace, and we need all the cash that we generate and more. There is no enunciated dividend policy as such, and dividends are likely to remain at similar levels for next 2-3 years.
19. WARREN BUFFETS TAKEOVER OF LUBRIZOL.
Any likely impact on the relationship? Please comment.
Our relationship goes back 11 years. We have seen four changes in ownership in these many years. From BF Goodricke, to Noveon, to Lubrizol and now Berkshire Hathway. Our relationship and support from Lubrizol has been very strong. We expect the same policies to continue for our markets.
20. CHALLENGES BEFORE THE COMPANY
Kindly elaborate on the main challenges faced by the company in view of the huge opportunities that lie ahead. How confident are you of reaching the turnover of Rs 1000 Cr an by when?
As mentioned before we should do Rs. 1000 Cr within the next 3 years. There are several big application markets that we need to tap effectively. Blazemaster is one, Solar applications is another. Along with the results, we will announce a few new initiatives!
Results on 20th May 2011. Analyst Meet on 25th May, 4-6 PM, Trident, Mumbai. Please be there!
Nagabrahma: No Holdings in the Company; Recent Entry;
Janak Merchant: No Holdings in the Company; ;
Donald Francis: Less than 5% of Portfolio in the Company; Recent Entry;
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